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SEC Charges Conn. Hedge Fund Manager With Fraud

The Securities and Exchange Commission and the Connecticut banking commission have sued a Connecticut hedge fund manager with fraud.

The SEC and Connecticut Banking Commissioner Howard Pitkin charged Southridge Capital Management LLC and its chief executive officer, Stephen M. Hicks, with defrauding investors with millions of undeserved fees.

According to a filing in federal court in Connecticut Monday, the SEC alleged that Hicks overvalued the largest position held by funds managed by Southridge and Southridge Advisors LLC. The SEC also said he made material misrepresentations to investors and misused their money to pay legal and administrative expenses of other funds managed by Hicks and Southridge.

The SEC said Hicks falsely valued Southridge's largest holding, speech recognition company Fonix Corp., at $30 million or more based almost entirely on a 2004 transaction in which Fonix bought two companies from an entity he controlled.

The SEC also alleged that Hicks fraudulently misled investors in funds he solicited beginning in late 2003. According to the SEC, he raised nearly $80 million from 2004 through 2007.


SEC: Inst'l Managers Must Report Votes on Exec Pay

Institutional investment managers may soon have to report to the Securities and Exchange Commission on what say they have on executive pay at the firms they invest in.

The SEC has filed a proposal to amend the Securities Exchange Act of 1934 and the Investment Company Act of 1940 so that institutional investment managers that file Form 13F-namely pension plans, endowments, managers of separately managed accounts, banks and broker-dealers-would have to annually report on a new upgraded Form N-PX how they voted on executive compensation proposals. Comments are due by Nov. 18.

"The institutional investment manager would be required to report votes on approval of executive compensation and on the frequency of executive compensation approval votes," the SEC said. The regulator said that the executive compensation would relate to "an acquisition, merger, consolidation, or proposed sale or other disposition of all of substantially all the assets of an issuer."

Currently, only registered investment management firms-namely, mutual funds-must report to the SEC just how they voted in all U.S. corporate proposals on Form N-PX.

Despite the more limited scope of disclosure, compliance won't be easy for institutional investment managers.

"It comes down to data collection. Institutional investment managers will have to gather the information on how they voted on a daily basis from multiple internal applications as well as any proxy advisory firms that may vote on their behalf," said Edward Johnsen, a partner with the law firm of Winston & Strawn in New York.

"The proposal is made more complicated by the fact that many larger financial institutions have multiple asset management and brokerage arms," Johnson said.


Quote of the Week

“The drumbeat continues [for money fund overhaul]. It’s not a subject that the industry will be able to sweep under the rug.”

Senior Vice President

Moody’s Investors Service